Economic Integration

The agreement among countries or regions to establish links through the movement of goods, services, capital, and labor across borders is known as economic integration. Economic integration includes at the far end a truly global economy in which all countries share a common currency and agree to a free flow of goods, services, and factors of production. At the other extreme would be a number of closed economies, each independent and self-sufficient. Each of the various integrative agreements in effect today involves some sacrifice of national independence and autonomy to enjoy the benefits of free trade and stable exchange rates. Levels of economic integration include the free trade area, the customs union, the common market, and the economic union.

Free trade agreements account for about 90 percent of the economic integration across groups of countries or regions (REI). While the primary function of REIs is to eliminate tariff and non-tariff barriers, open border controls to increase capital, increase resources, increase spending power by citizens, generate more jobs and profit between the countries engaged in the agreement, countries outside the agreement are subject to high tariffs, which may be set by the group as a whole (customs union, common market, and economic union) or set by the individual country (free trade area).

The free trade area is the least restrictive and loosest form of economic integration among countries. In [Page 561]a free trade area, all barriers to trade among member countries are removed. No discriminatory taxes, quotas, tariffs, or other trade barriers on free trade area members are permitted. The most notable feature of a free trade area is that each country continues to set its own policies in relation to nonmembers, including tariffs, quotas, or other restrictions that it chooses. The most notable free trade area is the North American Free Trade Agreement (NAFTA). Sometimes a free trade area is formed only for certain classes of goods and services; For example, an agricultural free trade area is restricted to agricultural goods only.

The customs union is one step further along the spectrum of economic integration. Like the members of a free trade area, members of a customs union dismantle barriers to trade in goods and services among themselves. In addition, however, the customs union establishes a common trade policy with respect to nonmembers. Typically this takes the form of a common external tariff, where imports from nonmembers are subject to the same tariff when sold to any member country. Tariff revenues are then shared among members according to a prescribed formula. The Southern African Customs Union and Andean Community (Comunidad Andina de Naciones or “CAN”) are examples of this model of economic integration.

Further still along the spectrum of economic integration is the common market. Like the customs union, a common market has no barriers to trade among members and has a common external trade policy. In addition, however, factors of production are also mobile among members. Factors of production include labor, capital, and technology. Thus restrictions of immigration, emigration, and cross-border investment are abolished. The importance of factor mobility for economic growth is very important. Mercosur, or the “Common Market of the South,” is an example of this form of economic integration.

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